TAKING advantage of tax breaks and allowances will help offset some of the extra tax faced by millions from 6 April. Higher income tax bills and shrinking of capital gains and dividend tax allowances from the new tax year means many will be paying more to HMRC.
Income tax bills will rise because the bands for basic and higher rate were frozen in the by Chancellor Jeremy Hunt in his Autumn Statement. The policy of not increasing allowances in line with the cost of living — or fiscal drag as it is known — forces millions of earners to pay more tax as salaries climb.
Some higher earners will also pay more tax because the threshold at which the 45% additional rate kicks in is being reduced to £125,140, from the current £150,000 from 6th April.
If you receive an income from dividends you could also pay more tax – or start paying tax for the first time. Currently you can receive £2,000 in dividend payments without any tax being due. But from 6th April the tax-free allowance is falling to £1,000 and then £500 in April 2024. Basic, higher and additional-rate taxpayers must pay 8.75%, 33.75% and 39.35% tax respectively on amounts higher than the tax-free limit.
Capital gains tax when selling an asset for a profit will also rise for many. Currently you can pocket up to £12,300 in profits from the sale of an asset without paying any tax. From April 6th the allowance will be halved to £6,000 — and again to £3,000 from April 2024.
So how can you beat the tax hikes?
There’s no escaping taxes. But you can do some damage limitation by maximising allowances where you can. Here are FIVE things you can do to be as tax efficient as possible:
1. Use your ISA allowance
It’s always been a smart move to utilise tax breaks offered by ISAs. But the shelter of an ISA used to invest in stocks and shares (instead of a cash version) will soon be even more valuable to protect against rising tax bills on investment income and gains.
Use as much of the £20,000 allowance as you can to protect your savings. If you don’t use your £20,000 annual allowance, you lose it.
2. Do a Bed and ISA
Moving income-producing investments inside an ISA could save you money on dividend taxes. By selling existing dividend generating shares, or funds, and then rebuying them within an ISA before the end of the tax year, you can then enjoy unlimited tax-free dividends.
Moving investments into an ISA would also be beneficial for those facing hefty capital gains tax bills when they cash in their investments. It can be a useful way to take advantage of any unused ISA allowance, especially if you have less new money to invest, whether due to the cost-of-living crisis or anything else.
Don’t leave a Bed and ISA application until the last minute as it can take time to organise the transactions. Providers are already busy which could slow things as the end of the tax year approaches. In February alone at interactive investor, Bed & ISA applications were up 206% year-on-year compared to February 2022.
3. Top up your pension
By using the tax relief on pension contributions you can pay less income tax. Everyone gets 20% paid by HMRC to their pension and if you pay income tax at a higher or additional rate you can claim relief on your self-assessment tax return at either 40% or 45%. If you’re self-employed, paying into a pension will save on your self-assessment tax bill as a higher rate (or top rate) taxpayer.
Extra pension contributions are a consideration for those employed or self-employed who earn between £100,000 and £125,140 in the current tax year. Personal allowances are tapered for those individuals which creates an effective income tax rate of 60%. If you can afford to do so, placing more into your pension will reduce your taxable income. Pensions even offer the unique benefit of being able to backdate unused allowances up to three years.
4. Invest for children
Consider a Junior ISA for tax-free investing, where you can shelter £9,000 each tax year until they reach 18. You could even start a pension for under-18s to shelter more money from HMRC. Tax rules allow up to £3,600 to be saved in a pension, such as a Junior SIPP, each tax year.
5 .Enjoy the gift of giving
With the inheritance tax threshold of £325,000 frozen until 2028, more estates are falling into the inheritance tax (IHT) trap. An eye-watering £5.9bn worth of inheritance taxes was collected by HMRC between April 2022 and January 2023 – £900m higher than the same period a year earlier.
By reducing the size of your estate you can shrink any IHT liabilities. HMRC allows you to gift £3,000 tax-free each tax year to loved ones, under the ‘annual exemption’ rule. You can also give £250 to any number of people every year, though you can’t combine it with your annual £3,000 gift. You can also utilise the ‘Potentially Exempt Transfer’ which allows you to give away of all types of assets, including cash, property and shares tax-free, if you live for seven years after making the gift.